When Ian Charles was CFO of Planful, the financial planning software provider, the company was seeing a lot of churn among customers that had been subscribers for several years. To get at the bottom of what was happening, he and the CEO at the time, Dave Kellogg, took a deep dive into the data and came to a clear conclusion: the company’s product fit best with larger enterprise customers; smaller customers struggled to get the maximum value out of the software.
“We called it light from a distant star,” said Charles, today CFO of Flexe, a logistics software company. “Contracts that were signed three and four years ago were churning.”
Poor product-customer fit isn’t uncommon among software companies, especially startups hoping to showcase their growth potential to investors.
“Most startups will grow at any cost and sign up any customer they can to put the win on the board,” Charles said last week in a CFO Thought Leader podcast. “The question is, is it sustainable?”
The analysis showed it wasn’t sustainable for certain customers of the financial planning software. Whether it was on the accounts receivable side — leaving because of payments — or the services side — leaving because of product fit — smaller companies would reach a point where they would stop renewing.
“We were targeting the wrong customer,” he said.
To course correct, they focused their resources on customers that could maximize the product value.
“We reoriented the company toward the larger enterprise, deals that were more sticky, more valuable on a long-term basis, and that were integrated into other systems,” he said. “That would mitigate the risk of churning after a short period of time. [The strategic question is], where do you want to put the company a year down the road, two years down the road, relative to the competition?”
Accumulating scar tissue
Charles' ability to bounce back from mistakes has been key to his growth as a finance leader, he said.
“It’s what I call scar tissue, or learnings,” he said. “That’s what best prepares us for being a CFO. It’s not just learning how to do the mechanical functions of accounting and planning; it’s also the mistakes. Where did we go wrong?”
One of his biggest mistakes was favoring investors too much over other company stakeholders, he said. That imbalance was the case when it came to setting what’s known as the 409 (A) ratio — the valuation differential between preferred stock, which goes to investors, and common stock, which goes to employees.
“In the early days of my career, I definitely leaned more toward maximizing the share price for the board rather than for the employees,” he said. “I’ve learned from that mistake.”
In a 409(A) valuation, the CFO, usually before an IPO or other liquidity event, like a private exit, looks at a range of variables to determine preferred and common stock prices. The rule, introduced by the IRS after the WorldCom and Enron accounting scandals in the early 2000s, requires companies to use a formula to set the ratio. Previously, valuations were set more informally.
“Maximizing share prices is not necessarily aligned between your board or your investors or your employees,” he said. “Striking a balance between what is a valuable equity instrument for your employees and what’s important to your board is a difficult challenge.”
Charles also made some hiring mistakes, he said. Today, for a leadership position like planning or accounting chief, he’ll interview close to three dozen candidates. Once he gets to his top two or three, he’ll bring them in four or five times to meet with him and others.
The process became this involved only after making bad hires over the years.
“Fear of failure produces a result like that,” he said. “Plenty of times I thought I was hiring a wonderful employee but I couldn’t have been more wrong.”
He also relied too much on his own assessment, he said. Today, he brings in more people to get their input. “Part of it was doing too much of it on my own,” he said.
At Flexe, which he joined in March, he has the opportunity to put his best practices in place; his priority for his first year is staffing.
“One of the hardest parts about the business right now is finding great people,” he said. “Good talent is hard to find, so our number one challenge is being able to staff our departments with great people. So, 12 months from now, I want to have the departments strongly staffed with the right executives in analytics and strategy, FP&A and accounting.”